The former chairman of Olympus, Tsuyoshi Kikukawa, was one of seven men arrested on Thursday in a dramatic escalation of the $1.3bn (£829m) fraud scandal at the Japanese camera manufacturer.

Kikukawa, former Olympus executive vice president Hisashi Mori and former auditor Hideo Yamada were detained along with two former bankers and two others, under suspicion of violating Japan's Financial Instruments and Exchange Act.

The men under suspicion were identified by an investigative panel, commissioned by Olympus, as having played a role in the 13-year cover-up of huge investment losses made in the late 1980s bubble economy through complex mergers and acquisitions deals.

Kikukawa, who headed Olympus for a decade until last year, is accused of concealing losses, booking overstated asset write-offs and falsifying financial statements, prosecutors said in a statement. He and 18 former colleagues are being sued by shareholders over the scandal.

The prosecutors also arrested Akio Nakagawa, cited in a December panel report as having aided Olympus in structuring its loss-hiding schemes. Nobumasa Yokoo, who was also named in the report, Taku Hada and Hiroshi Ono, were arrested by the Tokyo police, according to the statement.

"We take the situation seriously," Yoshiaki Yamada, a spokesman for Olympus, said by phone. "We will co-operate fully with investigators."